On Todays Episode of Let's Talk Bitcoin...

Adam B. Levine, Stephanie Murphy and Jonathan Mohan are joined by returning guest Paul Sztorc for a look at the past, present and future of Sidechains and the now-on-testnet "Drivechain" token recovery mechanism.

Saturday, 29 September 2018

This past week saw a flurry of reports and analyses released by various agencies and companies, speculating on the roles — past and present — of cryptocurrencies and blockchain technologies. Two big names in the blockchain industry are being scrutinized as they attempt to grow, and we put two privacycoins, Monero and Zcash, under the microscope.

Study Up!

A remarkable number of reports were released this week that, together, contributed to a comprehensive picture of the cryptocurrency industry’s trajectory. Two of them focused on stablecoins.

Contrary to the conclusion of another study by John Griffin and Amin Shams that Tether was being used to manipulate the price of bitcoin, a new report by Dr. Wang Chun Wei of the University of Queensland Business School states that the effect of the stablecoin is statistically insignificant as far as bitcoin pricing is concerned.

At the end of the week, Blockchain released a study that examined both the positive and negative aspects of stablecoins, painting an overall picture of optimism for the budding asset class.

Another study tackles the subject of malicious mining, also known as cryptojacking, in the cryptocurrency space, and it points out that the problem is on the rise as bad actors become more sophisticated.

And finally, after a series of roundtable discussions, MIT Connection Science and IBM issued a 41-page joint report on the role of blockchain in government. The findings illuminate discussions held by private and public sector leaders on the blockchain’s impact for government on digital identity, payments and supply chain/provenance.

Embattled Privacycoins

Earlier this month, we reviewed Monero as a privacycoin. This week, we learned about a bug in its code that could have had some serious consequences had it not been patched in a timely fashion. Continuing our series on privacycoins, we examined Zcash this week, and our coverage has since generated some fiery discussion on social media.

Big Names, Big Plans

Two of the biggest names in the crypto space have made some big news. Coinbase began by introducing an application process to onboard new altcoins and then went on to announce a new series of educational resources and a product that allows customers to buy a bundle of Coinbase’s listed assets.

Potential investors got a peek at Bitmain’s IPO prospectus this week, but the information contained within may make them pause before deciding whether or not to take a chance on the mining giant’s future.

Stablecoins have garnered serious investor attention over the past few weeks. Unlike bitcoin and similar cryptocurrencies, they are digital assets built to lessen price volatility and are often paired against the U.S. dollar or established commodities like gold. Volatility is one of the main reasons why several institutional investors and individuals have thought twice about stepping into the cryptocurrency arena, and stablecoins seek to make things a little less frightening.

has released a report examining the growth of the stablecoin trend, the differences between the growing number of stablecoins in circulation, and whether they truly work to lower volatility in the market.

In total, 57 stablecoins were examined, including Tether, TrueUSD, Dai and Digix Gold Token. About 26 of these stablecoins — roughly 45 percent — are live, while the remainder are in pre-launch phases. The number of active stablecoin projects has increased heavily over the past 12 to 18 months, and more than a dozen separate ventures have issued plans to launch new stablecoins by the end of the year.

The report states that most stablecoins can be separated into two categories: asset-backed and algorithmic (coins that have implemented a central banking platform to keep prices sturdy). Roughly 77 percent of those observed are asset-backed, with USD being the primary asset of choice amongst 66 percent of them. Most of the tokens — roughly 54 percent — utilize on-chain collateral.

More than 50 percent of the stablecoins offer “dividends” or have incentive mechanisms built into their designs; these already make up a healthy portion of the digital asset arena. Tether, for example, is now the second most traded digital asset after bitcoin and lists among the top ten cryptocurrencies by market value. It also accounts for nearly 98 percent of stablecoin trading. Many of these currencies are also listed on approximately 50 different digital exchanges, with Tether on a whopping 46.

The total market value for all current stablecoins is $3 billion, or roughly 1.5 percent of the total cryptocurrency market. Approximately $350 million in venture funds have been put toward the creation of stablecoins, and most are legally domiciled in the U.S. and Switzerland. A large portion of stablecoin teams prefer to set up house in the U.S., while regions in Europe such as the U.K. also remain popular.

Ethereum has proven to be the most widely used hosting platform for stablecoin projects, with approximately 60 percent of them building exclusively on top of the Ethereum blockchain. For the rest, top blockchain choices include Bitcoin, NEO and Stellar. Roughly 69 percent of stablecoin teams have made their code open-source for audit inspection, and some of the biggest investors in stablecoins include Pantera Capital, Coinbase, Circle and the Digital Currency Group.

The report introduces several use cases for stablecoins including “smart travel insurance.” Roughly 600,000 passengers each year do not file eligible insurance claims for canceled or delayed flights. What they don’t seem to know is that these flights become public record and can be queried by smart flight insurance software. If a plane fails to take off for any reason, the smart contract under the insurance will pay the claimant immediately and ease the claims process, while the insurance premium can be escrowed on-chain to remove counterparty risk.

Where stablecoins are failing is in their adoption rates. While enthusiasm does surround these currencies, the technology behind them is still very new and requires further experimentation before a perfect design can come about. Regulation surrounding stablecoins also remains uncertain, with one of the biggest issues being whether stablecoins comply with national securities and money service laws.

Furthermore, many stablecoins are thought to pose greater threats to fiat than standard cryptocurrencies and run the risk of sparking competitive backlash from traditional finance officials. Barry Eichengreen, professor of economics at the University of California, Berkeley, argues that stablecoins backed by USD, for example, introduce several additional expenses in that for every dollar’s worth of cryptocurrency issued, one dollar of investment capital is taken from national reserves. Thus, users are trading fully liquid dollars supported by the U.S. government for cryptocurrencies that are not fully established, possess “questionable” backing and are difficult to use.

He also claims that this kind of stablecoin trading model will only be attractive to money launderers and tax evaders, and he doesn’t expect the model to scale.

The report also says that certain stablecoins will weigh more heavily on the prices of entities like bitcoin and ether, which may lead to more aggressive competition in the crypto market.

However, the report does state that stablecoins are likely to see further adoption in the future and lead to generally stronger adoption rates amongst cryptocurrencies. The authors describe stablecoins as “a form of infrastructure or foundational layer for crypto assets that will generate immense value for the digital assets ecosystem.” They believe stablecoins will successfully address concerns surrounding volatility, though they assert this will be a long-term process.

Monero has officially released its Malware Response Workgroup website yesterday. In an effort to help protect Monero’s community, the website aims to provide resources to educate about the types of malware that may take advantage of users. It provides support for problems including unwanted in-browser and system mining (cryptojacking) and ransomware, all which have been a growing problem as of late.

In a blog post by Justin Ehrenhofer on the Monero website, the Malware Response Workgroup is “a self-organized set of volunteers that maintains these resources and provides live support.”

The post goes on to describe future efforts to provide support directly through the website; however, volunteers are currently available for live support at #monero-mrw.

The Burn Bug

The announcement of the working group is a second bit of positive news from the Monero community, coming shortly after it successfully patched a bug in its wallet code.

The “burn bug” never affected the actual protocol or the coin supply, but, if exploited, it would have allowed a malicious actor to profit significantly from inflicting damages on organizations within the Monero ecosystem, such as exchanges and any entity using a Monero wallet.

The bug could have been exploited as follows: An attacker first generates a random private transaction key. Then, they modify the code to merely use this particular private transaction key, which ensures multiple transactions to the same public address (e.g. an exchange's hot wallet) are sent to the same stealth address. Subsequently, they send, say, a thousand transactions of 1 XMR to an exchange. Because the exchange's wallet does not warn for this particular abnormality (i.e. funds being received on the same stealth address), the exchange will, as usual, credit the attacker with 1000 XMR. The attacker then sells his XMR for BTC and lastly withdraws this BTC. The result of the hacker's action(s) is that the exchange is left with 999 unspendable / burnt outputs of 1 XMR.

In the simplest sense, the bug allowed for funds to be sent in such a way that the recipient could not spend them, and the wallet would still report these as properly received funds.

It would have been possible to send multiple transactions to the same one time address, each transaction with a different key image. Since the one-time address can only be used once, it could only claim one of those outputs sent to it — but the wallet software was accumulating the amounts of all of those transactions.

While the concept of burning funds by sending multiple transactions to the same stealth address is nothing new in the Monero community, the consequences were never properly thought through if a third party, like an exchange, is involved. In May 2017, the topic was lightly discussed in a Monero SE Q&A. Users tossed around the idea, concluding they are “not sure of the implications or whether the protocol guards against this.” It was not until the hypothetical scenario included an exchange where the community realized the true implications of such an exploit.

The Discovery and Fix

The exploit was discovered on September 16, 2018, after Reddit user s_c_m_l described a hypothetical attack on exchanges that support the Monero’s XMR token. The scenario presented User A sending XMR to Exchange B via many transactions with the same stealth address, allowing User A to then exchange the currency he sent and proceed to cash out. This was the first time anyone had imagined such a situation.

Less than 24 hours after s_c_m_l proposed the attack in a Monero subreddit, another Reddit user, Vespco, posted the idea in the official Monero subreddit. Shortly after, a patch was created by the Monero dev team and applied on top of the v0.12.3.0 release branch. The patch was implemented via a pull request.

After pull request #4438 was implemented, the developer community privately notified as many exchanges, services and merchants in order to minimize the number of organizations that would be exposed when the official announcement was made.

Monero Community Responses

As dEBRUYNE mentions in his blog post, this practice was not ideal because there were inevitably organizations that they weren’t able to notify. The behind-the-scenes notifications could also have been viewed as preferential treatment, which is never ideal for a community fostering decentralization and fairness.

Following the patch release, community members on Reddit were unsure how to perceive the outcome of the situation and were debating if the Monero dev team should have disclosed that there was a bug while they were working on a patch instead of after. Reddit user fort3hlulz suggested:

“I *do* think that a simple disclosure would be helpful in the future … [for example] a bug is reported and found to be real. Monero devs make a post that there *is* a bug, that it is being worked on, but without details on what/exploit details.”

What’s unusual in this circumstance, however, was that the bug was originally mentioned in Reddit as opposed to the official Monero Dev group, which left the community, devs included, unsure how to announce that there was indeed a bug. Nonetheless, the quick response by the entire community, developers included, seems to have reinforced confidence in Monero.

In the future, Monero and its community hope that further community efforts like the Malware Response Workgroup will provide better resources for users to report bugs of all types. Referring to the main focus of the group, Ehrenhofer writes “We will not be able to eliminate malicious mining, but we hope to provide necessary education for people to better understand Monero, what mining is, and how to remove malware.”

In what seems like the first coordinated strike from government agencies, the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Federal Bureau of Investigation (FBI) have taken action against a securities broker for violating federal laws in connection with security-based swaps funded by bitcoin.

On September 27, 2018, the SEC announced that it had filed charges at a U.S. District Court for the District of Columbia against Marshall Islands-based securities company 1pool Ltd., also known as 1Broker, and its Austria-based CEO Patrick Brunner for trading security swaps to American investors and others across the world without meeting the "discretionary investment thresholds required" by federal securities law.

The SEC further claims that 1Broker was fraudulently issuing swaps as it was not a registered "securities-based swaps dealer," and it also failed to transact on a registered national exchange.

Commenting on the claims, Shamoil Shipchandler, director of the SEC's Fort Worth regional office, said the SEC would protect U.S. investors on any platform regardless of the currency used in the transaction.

"International companies that transact with U.S. investors cannot circumvent compliance with the federal securities laws by using cryptocurrency."

The SEC is seeking permanent injunctions, penalties and "disgorgement plus interest" against 1Broker and its CEO.

Responding to the SEC's allegation, 1Broker assured customers of the safety of their funds and said they were ready to cooperate with the SEC.

The CFTC filed a similar complaint against 1Broker for illegally offering off-exchange, transactions, not registering as a Futures Commission Merchants (FCM), and failure to implement anti-money laundering and supervisory features.

The statement from the CFTC reads in part:

"Entities required to be registered as FCMs such as 1pool, are required by Commission Regulations to diligently supervise all activities of their officers, employees, and agents relating to their business as an FCM, including the handling of customer accounts, and to implement and maintain adequate supervisory systems and procedures."

The Federal Bureau of Investigation followed this up with a seizure of the 1Broker.com domain name. The Bureau claims the domain was taken down after a U.S. District Court for the District of Columbia found probable cause that it's in violation of federal laws.

The Blockchain Trust Accelerator (BTA) has received a six-figure grant from the Social Alpha Foundation (SAF) to build its latest project known as The Impact Ledger, an online registry of blockchain projects designed to assist in the public, nonprofit and for-profit sectors.

BTA was founded in 2016 and seeks to connect philanthropists with civil society organizations, governments and technologists to establish blockchain pilots for social good. The organization operates as a not-for-profit enterprise between the Bitfury Group, New America, the National Democratic Institute and the Rockefeller Foundation.

SAF works to educate communities, both local and abroad, on the benefits of blockchain technology and inspire them to utilize its capabilities for social ventures. Founded in Hong Kong in 2017, the company offers funding to businesses and other organizations that try to improve the environment, public health and formal education systems through blockchain technology.

Applicants that qualify for SAF grants receive anywhere between $10,000 and $100,000 for their projects. Most of the SAF’s funds are garnered through cryptocurrency token sales and ICOs. Among the association’s past grantees are Aparna Krishnan, who co-founded Mechanism Labs in June 2018 and was awarded the prestigious Thiel Fellowship.

Tomicah Tillemann is the co-founder of BTA. Speaking with Bitcoin Magazine, Tillemann states that blockchain technology is emerging when trust in organized leadership is at an all-time low.

“According to the Edelman Trust Barometer, trust in nonprofits dropped nine points amongst the general population and a staggering 22 points among the informed public from 2017 to 2018,” he claims.

“We agreed to define parameters for, establish and manage a comprehensive registry of blockchain projects in the governance and social impact space. The goal is to help organizations and governments learn what has been attempted, what has been successful, and assess whether these solutions can scale. Also, it is difficult to persuade organizations to share information. We would like to work on encouraging the blockchain community to engage in more collective learning around both successes and failures.”

Similar projects such as ConsenSys Social Impact, which seeks to empower students by helping them develop blockchain projects for social good, have also appeared on the horizon in recent weeks. Tillemann says that ConsenSys has been a key partner in the development of the Impact Ledger, and that executives are contributing information from within their ecosystem to assist in the development of the registry.

Furthermore, he says that three specific audiences stand to benefit from the Impact Ledger the most, the first being individuals and organizations undertaking social impact blockchain projects. A listing on the Impact Ledger would bring newfound attention and resources to their projects.

The second group is the people that these projects are built to assist, while the third includes organizations that could benefit from the blockchain for social impact but have yet to undertake any projects. This would include NGOs and funders, corporations and even startups.

“The Impact Ledger will increase the flow of resources toward maturing the technology and, ultimately, the impact of social and civil projects,” Tillemann said.

The newest episode of What Bitcoin Did features a debate between two crypto advocates with a strong economic background, Caitlin Long and Dr. Saifedean “Saife” Ammous. It was loosely moderated by regular host Peter McCormack and the discussion was lively.

Caitlin Long, a recurring guest with the podcast network, has been involved with Wall Street financial banking for more than 20 years and has been a firm advocate for cryptocurrency since 2012. Dr. Saifedean “Saife” Ammous, on the other hand, comes from a more academic background and has been a professor of economics for several years. Having embedded himself in the space for several years, Ammous is also the author of a book on cryptocurrency and economics, “The Bitcoin Standard.”

These two experts share many views about the direction of cryptocurrency and the greater financial industry, approaching the issue from wholly different spheres that still go on to influence popular thought in economic theory. Although the two come from different backgrounds, Long claimed that “I suspect we don’t disagree on a whole lot,” beginning the conversation by discussing the times she’d recommended Ammous’ book to other professionals.

Nevertheless, McCormack moderates the two through a stimulating discussion on many topics of common interest, including the relevance of Austrian Economics to our modern times, several specific areas which prominent Austrians such as Murray Rothbard failed to predict, and cryptocurrency’s fate in the context of an impending worldwide economic catastrophe.

This episode is from just one of several cryptocurrency podcasts that are held to similar standards of information and quality, all of which are available on the Let’s Talk Bitcoin Network.

A bill that seeks to create a task force to combat the use of cryptocurrency in financing terrorism has just passed the House of Representatives. House Resolution 5036 (H.R.5036), which purports to establish the "Independent Financial Technology Task Force," was sent to the House of Representatives on Wednesday, September 26, 2018, before it passed an unanimous voice vote and has now moved to the Senate for consideration.

The proposed bill, which was introduced by Representative Ted Budd, is seen as a positive move from U.S. lawmakers, which aims to mitigate the use of cryptocurrencies in terrorist financing. The task force would focus on researching the ways in which terrorism could be financed through cryptos and propose actions to curb such activity.

In addition to the creation of the task force, the bill would also support the development of tools and programs to detect any illicit use of cryptocurrency.

Public records from Congress indicate that the bill was passed by the House without contention. Seeing as the vote was unanimous and the bill wasn't a controversial one, the motion to reconsider was laid upon the table and gavelled out, so it will now procede to a vote in the Senate.

In addition to having federal law enforcement studying cryptocurrencies and how terrorists are exploiting them, the bill also proposes rewards for those who provide information that leads to the conviction of those involved in crypto terrorism financing. These rewards will be paid out from the funds seized from convicts, as well as from related fines and forfeitures.

H.R.5036 is seen by many as a more robust version of another cryptocurrency-related bill. Released earlier last year, the House of Representatives introduced the "Homeland Security Assessment of Terrorists Use of Virtual Currencies Act" which seeks to make a proper threat assessment on the use of cryptocurrencies by terrorists.

One of the talking points of the Act is the way it defines virtual currencies. It defines virtual currencies as any digital representation of value functioning as a medium of exchange, store of value or a unit of account. This broad definition includes bitcoin, ether, a virtual debit card and even a Paypal balance.

Clarification: An earlier version of this article mistakenly claimed that the bill would not procede to the Senate due to a point of procedure. The error has been corrected.

'œNegative interest rates are purely a construct of the artificiality of the monetary system. There is going to a major bond crash - the challenge is that this could be years if not decades away, or it could be tomorrow.'

'" Caitlin Long

'œWhat is going to be interesting in the next crisis is whether Bitcoin behaves as a speculative asset. Will people exit it towards more safer, more liquid assets like the Dollar or gold, or whether it is going to behave more like safe haven asset itself, and people will be exiting other things, particularly the altcoins for the relative safety and liquidity of Bitcoin.'

'" Saifedean Ammous

Interview location: Skype

Interview date: Fri 21st September 2018

Following the 2008 market crash, analysts are highlighting new risks for the global economy with rising government debt presenting a risk of a bond crash. The last 12 months have also seen a fall in the value of the local currency in countries such as Iran, Turkey and Venezuela. Data from Local Bitcoin's highlights that in failing economies, Bitcoin is often seen as a safe haven.

Bitcoin is playing an increasingly important role in the global economy with regulators and Wall Street coming to the table.

In this episode, I talk with the author of The Bitcoin Standard, Saifedean Ammous and Wall Street veteran, Caitlin Long. We discuss:

The U.S. Congress has nixed a bill that looked to create a task force to combat the use of cryptocurrency in financing terrorism. House Resolution 5036 (H.R.5036), which purported to establish the "Independent Financial Technology Task Force," was sent to the House of Representatives on Wednesday, September 26, 2018, for consideration.

At the time it was introduced by Representative Ted Budd, the proposed bill was seen as a positive move from U.S. lawmakers, which aims to mitigate the use of cryptocurrencies in terrorist financing. The task force would focus on researching the ways in which terrorism could be financed through cryptos and propose actions to curb such activity.

In addition to the creation of the task force, the bill would also support the development of tools and programs to detect any illicit use of cryptocurrency.

Public records from Congress indicate that the bill was passed by the House before the "motion to reconsider" was "agreed to without objection." Seeing as the bill was accepted before being reconsidered, this misstep means that the bill can not proceed to be ratified, per congressional rules.

In addition to federal law enforcement studying cryptocurrencies and how terrorists are exploiting them, the bill also made room for rewards for those who provide information that leads to the conviction of those involved in crypto terrorism financing. These rewards would have been paid out from the funds seized from convicts, as well as from related fines and forfeitures.

H.R.5036 was seen as a more robust version of another cryptocurrency-related bill. Released earlier last year, the House of Representatives introduced the "Homeland Security Assessment of Terrorists Use of Virtual Currencies Act" which seeks to make a proper threat assessment on the use of cryptocurrencies by terrorists.

One of the talking points of the Act is the way it defines virtual currencies. It defines virtual currencies as any digital representation of value functioning as a medium of exchange, store of value or a unit of account. This broad definition includes bitcoin, ether, a virtual debit card and even a Paypal balance.

Leading companies in the gaming and blockchain space have come together to form the Blockchain Game Alliance, a coalition that will advocate for blockchain development within the gaming industry. The Blockchain Game Alliance will create an open forum for stakeholders to “share knowledge and collaborate on research which fosters new ways to create and play games.”

The Alliance was announced at the inaugural Blockchain Game Summit which was held from September 25-26, 2018, in Lyon, France. The Blockchain Game Alliance is made up of influential companies such as Alto, Gimli, Fig, Ubisoft, Ultra, B2Expand, ConsenSys, EverdreamSoft and Enjin.

Nicolas Gilot, co-CEO of Ultra, a PC game publishing platform built on the blockchain, told Bitcoin Magazine the alliance will “democratize blockchain within the gaming industry.”

“We believe that by supporting each other and by having some of the brightest minds in the industry facilitate research and development, together we can drive disruptive change and deliver a fully fledged and improved user experience,” Gilot added.

The Alliance will also be used to develop best practices and common standards that promote the alignment and uniformity of blockchain integration within the community.

“The Blockchain Game Alliance aims to leverage our combined skills and expertise to provide a bridge between blockchain and gaming to accelerate industry adoption,” Dan Biton, co-founder of Gimli, noted in a statement put out by the new alliance.

Some exciting use cases for blockchain technology in the gaming community includes using characters in multiple games with interlinked environments. Using blockchains to track in-game items can also help increase the value of those items by providing new ways to use them in and out of the games.

Developers can also create rare items and prove their scarcity — one of the reasons why trading card games like Spell of Genesis became so successful within the community. Special wallets can then be used to store these assets for proof of ownership and facilitate item/asset trades between games.

Distributed ledgers can also mitigate the fees users and merchants must pay for in-game payment gateways and subscription fees, as decentralized payment gateways and cryptocurrencies feature cheaper fees than their credit card company counterparts.

Internet and phone giant AT&T has designed a set of blockchain solutions compatible with both IBM and Microsoft technology to help customers reduce risks and costs and solve other complex business problems. The company has been piloting the program since February 2018.

By working with IBM, AT&T says its solutions can record data on the IBM Blockchain Platform, which hosts numerous live networks and supports several provenance, logistics and supply chains. AT&T is also integrating its asset management operations center with the IBM Maximo Network on Blockchain and Maximo Asset Health Insights to offer safer service provider networks to infrastructure asset management firms.

In addition, AT&T is integrating with Microsoft Azure’s blockchain technology, which supports many enterprise ledger protocols including Fabric, Corda, Quorum and Ethereum, and offers varying computer network structures for both single member, multi-member and dev/test consortiums. AT&T believes its partnership with Microsoft will bring an extra layer of transparency to its growing list of supply chains.

According to Mark Wright, VP of media services and sponsorships at AT&T, further transparency is one of the company’s biggest goals.

“Who, specifically, are those tech providers [in the supply chain], and how much of a fee are they assessing to my working media dollars?” he asks. “It’s pretty murky, and thus you need technology to help you get under the hood.”

Customers that work in manufacturing, retail and healthcare will be able to utilize this new technology to both digitize and automate business processes. AT&T says they’ll have better resources to track information and manage goods from their creation until their delivery, while keeping directories up to date and secure. This can reduce potential waste, excess stock and the breach of private information.

Andy Daudelin, vice president of Alliances Business Development for AT&T Business, states, “Blockchain is far more than just bitcoin or cryptocurrency. It’s transforming the way many companies conduct business. Blockchain improves security and enables better management of transactions through complex processes. Utilizing our global network and IoT capabilities, AT&T enhances blockchain by providing edge-to-edge solutions that automate the tracking and that can even monitor the environmental conditions throughout the process.”

This isn’t AT&T’s first venture into blockchain territory. The company filed for a blockchain patent back in November 2016 for a home content delivery product that would provide content while verifying subscriptions through a distributed node network model. The server would act like a cable box while bringing further stability and security to existing systems.

In a landmark case for the cryptocurrency industry, a federal judge has ruled that a cryptocurrency caught in the midst of a lawsuit is a commodity, court documents reveal.

U.S. District Judge for Massachusetts Rya Zobel has decided that the suit’s prosecuting party — the Commodity Futures Trading Commission (CFTC) — can proceed with its case against My Big Coin Pay Inc. as its cryptocurrency My Big Coin (MBC) does not fall into the category of a security.

My Big Coin was founded in December of 2013. Allegedly based in Wyoming, the company offers its own digital wallet to store cryptocurrencies and a digital exchange to trade them. My Big Coin began selling its own currency — MBC — through an initial coin offering (ICO) and made approximately $6 million from 28 separate investors by promising 1 percent interest per year to investors that kept their wallets open.

The CFTC claims that the ICO has all the same behavior and qualities of a Ponzi scheme. They allege that the company is based in Las Vegas, not Wyoming, and that owners Randall Crater of New York and Mark Gillespie of Michigan used customer funds to purchase expensive items for themselves.

In addition, the CFTC believes the money was raised through several false claims, including that MBC was backed by gold and traded across several different exchanges, and that My Big Coin had recently struck a partnership with MasterCard.

Charges were filed back in January of 2018. The company’s accounts were frozen, and executives were blocked from accessing them. They were also prohibited from disposing of any financial records.

According to court documents, Judge Zobel believes that MBC classifies as a commodity because it is a cryptocurrency like bitcoin:

“The amended complaint alleges that My Big Coin is a virtual currency, and it is undisputed that there is futures trading in virtual currencies (specifically involving bitcoin). That is sufficient, especially at the pleading stage, for plaintiff to allege that My Big Coin is a ‘commodity’ under the [Commodity Exchange] Act.”

Defending lawyer for My Big Coin Katherine Cooper expressed her disappointment in the decision and continues to argue that the CFTC holds no precedence. In the court documents, she argues that “contracts for future delivery” are indisputably not “dealt in” My Big Coin. Thus, the currency cannot be classified as a commodity under the ECA.

“My Big Coin does not have future contracts or derivatives trading to it,” she asserts. “It is not a commodity. Now that we are moving past the motion-to-dismiss phase of the case, we look forward to challenging the CFTC’s ability to prove many of the factual allegations in the complaint. Among those factual allegations are those which speak to the relatedness of bitcoin and My Big Coin, and, therefore, the CFTC’s jurisdiction,” she said.

Defining crypto tokens has not always been an easy feat for U.S. lawmakers. Recently, federal judge Raymond Dearie in New York invoked decades-old securities laws to decide that two separate ICOs, one for REcoin and one for Diamond, classified as securities. Both projects were run by Maksim Zaslavskiy who claimed that REcoin was backed by real estate and that Diamond was backed by real diamonds. Neither entity backed the coins, and Zaslavskiy has been charged with two counts of securities fraud.

Dearie stated that the ICOs in question were “investment contracts” according to the Securities Exchange Act of 1934 and the Howey Test, which states that a transaction is an investment contract if a person invests money in a “common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

Dearie asserts customers expected returns on their investments and even referenced the DAO Report in his decision, which was issued in July of 2017 and explains that all tokens sold on Ethereum-based platforms, like both REcoin and Diamond, were securities.

Dearie, however, stated that the laws were meant to be interpreted flexibly and that not all ICOs could be considered securities. The same could be said for the My Big Coin case, as the classification of the cryptocurrency as a commodity is confined to the case at hand and does not extend to other crypto assets currently available on the market.

Bitmain, the biggest company in bitcoin mining, has filed for its IPO in Hong Kong. As part of the approval process, the company submitted a prospectus to the Hong Kong stock exchange at the end of August 2018. The prospectus was published on September 26, 2018.

Most of the document’s financial data is old information, except for that of Q2 of 2018. When Bitmain raised $400 million in a pre-IPO round last month, leaked financial documents provided most of the information we see in the prospectus now. The new prospectus includes three months beyond what was previously known. And that new information tells a bigger story.

According to the new prospectus, Bitmain posted $701 million in net profit in 2017. Yet, for the first half of 2018, Bitmain claims a gross profit of $743 million, despite a massive slump in crypto markets. This is odd because one would expect any company in the cryptocurrency business to have felt the pinch from this decline.

In fact, Bitmain has. The leaked pre-IPO presentations showed that Bitmain made a $1,137 million net profit in Q1. This means Bitmain actually lost $400 million in Q2.

About Bitmain

Most of the Beijing-based firm’s business comes from making ASIC mining rigs used to mine bitcoin and other cryptocurrencies.

According to its IPO prospectus, 90 percent of the company’s profits came from miners in 2017. And in the first six months of 2018, miners accounted for 94 percent of the profits. The rest of the profits came from mining farms, shared mining pools, AI chips and blockchain services.

In addition to having a corner on 74.5 percent of the entire crypto mining market, Bitmain also runs two of the biggest bitcoin mining pools, AntPool and BTC.com, and is an investor in ViaBTC, a smaller mining pool and exchange.

Where Bitmain Lost Money

In its prospectus, Bitmain explains that losses in 2018 were mainly due to having an excess of inventory and having to sell its miners at a lower price. (As the new prospectus reveals, in 2018 Bitmain suffered an inventory write-down of $391 million.)

Reflecting that, the company’s gross margins are in decline. In the first half of 2018, Bitmain’s gross margin was 36 percent, down from 48 percent in 2017 and 54 percent in 2016. Contributing to that, cost of sale percentage was 52 percent in 2015, 52 percent in 2016 and 64 percent in H1 of 2018.

Antminer sales is not the only area where the company lost money. Since the beginning of 2017 to mid-2018, Bitmain failed three times in trying to come up with a more efficient mining chip. Each of those efforts cost Bitmain hundreds of millions of dollars. Those costs amounted to losses of $500 million. This pinpoints the risks and costs involved in making silicon chips. It is also important to note that any successful company needs to take risks, so this is not necessarily a bad thing.

Bitmain also lost money in its bitcoin cash investment. It is no secret that Bitmain is a huge fan of the alternate cryptocurrency that resulted from a controversial fork in the bitcoin code in mid-2017. In support of the coin, Bitmain sold much of its bitcoin holdings (which it got from mining bitcoin and also accepting bitcoin as a form of payment for its Antminers) in exchange for bitcoin cash.

In December 2018, Bitmain owned 5 percent of all of the bitcoin cash in circulation, according to the leaked prospectus. Most of those holdings were bought at $900 on average. Price declines in bitcoin cash caused the company to lose about $500 million in 2017. (Bitcoin cash is currently at $550.)

A Risky Bet?

Despite these figures, Bitmain has already raised $785 million in venture capital funding this year (its net cash balance went from $105 million in Q1 to $343 million in Q2, and Bitmain has raised even more in Q3), and it is planning to go public in 2018 or early 2019. The company has not said how much it hopes to make in its IPO, but some estimates put it in the ballpark of $14 billion.

This could make the Bitmain IPO one of the largest IPOs of all time. Facebook’s IPO (2012) was worth just over $16 billion and that of Visa (2008) was $17.9 billion. (In its prospectus, Bitmain said it will funnel the money into research and development and expanding its production output.)

Yet, for investors, the question is: What are Bitmain’s prospects for the future, given that most of its current profits come from manufacturing mining rigs? Crypto markets exert a strong influence on Bitmain’s revenues, but they are declining. Since December 2017, the price of bitcoin has fallen 65 percent from its all-time high. At press time, bitcoin sits at about $6,500.

A lot else is changing in the crypto space — regulation, for one. China has been taking increased action to clamp down on all things cryptocurrency. And in the U.S., regulators are starting to get tough with crypto exchanges and bring down the hammer on questionable initial coin offerings. All of this will have an impact on the price of bitcoin.

Also notable in a report issued in August 2018, analysts at investment firm AllianceBernstein questioned Bitmain’s sketchy cash flow and suggested the company may be slowly losing its edge.

Ultimately, it will be up to investors to weigh Bitmain’s potential down the line. As for the company’s competitors, the influx of cash from an IPO is likely to give Bitmain a much needed boost.

The Zug-based startup is headed by former UBS managers Guido Buehler, who serves as CEO, and Andreas Amschwand, who serves as chairman.

SEBA will manage cryptocurrency trading and investments for banks and investors. It will also provide corporate financing services among which are technical guidance on initial coin offerings, cryptocurrency services to conventional clients and groups, and banking services to traditional corporate clients.

“SEBA wants to bridge the gap between traditional banking and the new world of crypto,” Buehler explained to Business Insider.

“With safety, transparency and performance as core values, our ambition is to become a market leader in the convergence of traditional finance with the crypto economy.”

Efforts at translating its financial base into an entity are now dependent on being granted a banking license from the Swiss Financial Market Supervisory Authority (FINMA).

From the creation of a digital ID for citizens built on the Ethereum blockchain to the acceptance of bitcoin payments for municipal services, the Swiss town of Zug has become known as the "crypto valley" of the world.

More than 500 blockchain startups call the town of Zug home, but as the industry has grown, it has faced restrictive banking services, forcing companies to look abroad for banking services, until mortgage bank Hypothekarbank Lenzburg opened its arms to the industry three months ago.

“In Switzerland, we have the commitment from various authorities to establish a comprehensive regulatory environment for the development of blockchain technology and the sustainable, stable, growth of crypto assets,” Amschwand explained in a statement.

“This makes Switzerland the ideal place to launch a new financial services paradigm.”

The eclectic group of investors who have a stake in the business includes Swiss-based BlackRiver Asset Management and Hong Kong-based Summer Capital among other financial backers from Switzerland, Malaysia, Hong Kong, China and Singapore.